Brazilian Healthcare giants Dasa, Rede D’Or and Fleury announce acquisitions – analysts expect more

RIO DE JANEIRO, BRAZIL – On Tuesday night, June 1, three publicly traded Brazilian health care giants, Rede D’Or (RDOR3), Dasa Group (DASA3), and Fleury (FLRY3), announced the acquisition of assets to maintain the dispersed sector’s consolidation trend.

Rede D’Or has completed the acquisition of Serra Mayor Hospital, located in the city of São Paulo, in the highly populated Capão Redondo neighborhood. The enterprise value (EV) was R$130 (US$25.6) million, with projected earnings before interest, taxes, depreciation, and amortization (EBITDA) of R$17 million by 2022, after synergies, implying an EV/Ebitda multiple of 7.6 times in 2 years.

Fleury announced the acquisition of Laboratório Pretti and Laboratório Bioclínico, both in Espírito Santo (ES). The fair values for transaction purposes are R$193.1 million and R$122 million respectively, thus adding about 40 service units to its total base. The estimated EBITDA for these acquisitions has not been disclosed.

The Dasa group made the largest transaction among the 3 companies, with the acquisition of Bahia Hospital (HBA S.A.) in Salvador (BA) for R$850 million in cash. Levante Ideias de Investimentos points out that, with the operation, Dasa is “setting its foot in a highly disputed market.” The estimate is for an EV/Ebitda multiple around 13 times for the acquisition, one of the most relevant after its capital reopening.

As highlighted by Levante, although the sector is still quite dispersed in all segments (hospitals, treatment clinics, diagnostic laboratories, and health plans), competition is becoming fiercer in major urban centers, with higher population densities, and several publicly traded companies are starting to operate in the same region.

“Looking at each acquisition individually, we see a positive impact on the shares of the 3 companies, given that they are all very well-capitalized, particularly Rede D’Or with its recent IPO and follow-on (subsequent stock offering),” Levante assesses. In addition, it points out that the health sector demands more and more scale, a mandatory requirement for companies to ensure good profitability.

Dasa’s strategy is to aggregate hospitals and diagnostic centers under the same umbrella, Levante points out.

Bradesco BBI assesses that the acquisition of HBA, marking the entry of Dasa in Salvador, Bahia, which has about 1.6 million beneficiaries and is the 6th largest market in Brazil, is a very important move for the company.

Analysts also see the acquisition multiples as positive: Dasa paid around R$2.6 million per bed (based on HBA’s current 330 beds), or R$2.1 million per bed, including ongoing expansions with the plan to reach 405 beds (assuming no additional capex to complete the expansion). The value is below the historical average price for the sector, between R$3.0 and R$5.0 million.

The expectation is that synergies may occur with the reduction of medical and material costs, with the adoption of a centralized cost structure (perhaps with some 20% and 30% discounts on these products) and some cost reduction with the 75 additional hospital beds to be completed. As for HBA’s accredited network, it is already vast, covering all major insurance carriers. Thus, analysts reiterated a positive outlook on Dasa, with an outperform recommendation and a target price of R$80 for 2021.

Levante points out that Fleury has been trying to diversify its line of business beyond diagnostic centers, incorporating clinics for advanced and diverse treatments, expanding the range of services offered within its assets.

Itaú BBA classified the news about Fleury’s acquisitions in Vitória as neutral. The bank says it does not have enough data to assess the potential added value the deal may have but says that in terms of revenue it does not seem much above Fleury’s current value. Nevertheless, the bank praises Fleury’s efforts to diversify gross revenue growth, and strengthen its services portfolio. Itaú maintains its market perform recommendation for Fleury, with a target price of R$29.

In turn, XP points out that, albeit small, it sees the transaction as positive, as it expands Fleury’s national reach for a reasonable price. Analysts expect synergy gains to dilute the implied multiples, particularly considering the likely increase in services offered at Pretti and Bioclínico.

“Finally, considering the size of the transaction and that we see FLRY3 trading at a price-to-earnings ratio of 24.4 times the expected for 2021 and 21.4 times the expected for 2022, which is in line with its historical average, we reiterate our neutral recommendation for the company and our target price of R$29 per share,” they point out.

Rede D’Or, in turn, has been seeking scale in a more concentrated way and where it has proven expertise: management of high-end hospitals, Levante points out. In turn, Credit points out that the area of this latest acquisition is highly populated, but with low socioeconomic indicators.

Luis Sales, analyst at Guide, also points out that the move comes one week after the hospital chain announced, through its affiliate Integrated Hospitals Gávea S.A. (São Vicente Clinic), completed the acquisition of 100% of Balbino Hospital, located in Rio de Janeiro.

The news was seen as marginally positive by the analyst: “Rede D’Or is showing another acquisition movement in the dispersed hospital sector. We expect this trend to continue due to the accelerated advance of consolidation in the health sector, observed in the number of deals (the most important being the merger between Hapvida HAPV3 and Notre Dame GNDI3 ) but also in new companies in the segment raising funds in the capital market,” he points out.

“Scale and Verticalization”

Looking at the overall scenario for mergers and acquisitions in the sector, Levante points out that the pandemic has led many smaller assets to become “attractive” for acquisition, with the sector’s major players benefiting from the opportunity on the radar.

The sector’s dispersion is seen as understandable, given Brazil’s territorial extension and due to medical services, which to a large extent up to the start of the pandemic required an almost full physical presence of the patient. With the rapid advance of telemedicine, many basic consultations can now be performed remotely, analysts assess, also enabling greater economies of scale and verticalization.

“We believe that there is still plenty of room for the big players in the sector to expand without too much harmful overlap, but the keywords in the sector have been ‘scale and verticalization’,” they say.

Thus, the analysts foresee a scenario of gradual and consistent growth for the leaders in the healthcare sector and mergers, acquisitions, and unit expansions. “All the major players in the sector remain with low debt, higher multiples in relation to recent acquisitions, and with solid cash, suggesting that we can expect a cycle of growth and consolidation for at least a few more years,” they point out.